The perfect place for your bonus to become a bonanza

Pieter Albertyn, Head of Product Solutions at Momentum Investo, plays game show host.

I don’t often watch a game show on television, but when I do, I’m always amazed at the excitement. Robert Thompson, a professor of television and popular culture at Syracuse University in New York, claims game shows give people a chance to live out their fantasies. If somebody else wins, the watcher believes it could be them, too.

Of course, there are many games where skill or general knowledge plays a role, but sometimes chance can lead to a contestant walking away with the proverbial money or the box.

I want to suggest a more pragmatic way of getting your hands on something extra. The show I want to recommend may not boast a host in a silver jacket or with a top hat, but it can be as magical. It is within reach of us all, and you don’t need a face for television or lots of confidence to participate.

My showstopper is often quoted by Warren Buffett, also called the Oracle of Omaha: Compound interest. The “compound” refers to two kinds of interest working for you – the growth you earn on the money you invest, as well as the growth you earn on that growth. That’s where the magic comes in. To be practical, let’s add two more ingredients: time and a financial adviser who can help you choose a fund where you will feel comfortable with the risk and the growth rate.

We’ve made some sums to illustrate what happens if a person adds a yearly lump sum to their regular retirement investments.

The reason for choosing a retirement example, is that apart from the other benefits, you get money back in your pocket for every rand you put in your retirement savings. This percentage is the same as the income tax you normally pay, your so-called marginal tax rate.

Let’s say Tumiso (30) is earning R30 000 monthly (and pays income tax of 26%). He contributes R4 500 per month to a retirement annuity (RA) and we assume the money grows at 12% per year. We also assume his salary increases by 5% per year, and he will increase his retirement contributions by the same rate.

Now we look over his shoulder over the next 25 years until he reaches the retirement age of 55.

• Scenario 1: He sticks to his plan and adds no further contributions.
• Scenario 2: On top of his monthly investments, he invests a 13th cheque every year.
• Scenario 3: On top of his monthly investments, he reinvests the tax rebate he receives every year.
• Scenario 4: On top of his monthly investments, he invests his 13th cheque as well as the tax rebate he receives every year.

If we round the retirement value off to the nearest million, this will be the picture:

Scenario 1: Only RA – R21 million
Scenario 2: RA + 13th cheque – R32 million (53% more)
Scenario 3: RA + tax rebate – R26 million (25% more)
Scenario 4: RA + 13th cheque + tax rebate – R37 million (77% more)

(The real value – what the money could buy you today – of the four scenarios are R3,6 million; R5,5 million; R4,5 million and R6,4 million.)

This means the discipline of adding a thirteenth cheque (or similar once-off amount) every year will increase your retirement money by more than 50%. That is incredible. And if you reinvest your yearly tax rebate on top of that, instead of spending it, your retirement money will be an incredible 77% more. Regular habits pay like you won’t believe.

With little imagination, you can see the stardust sprinkled over the results. Don’t ever underestimate the magic and power of compound interest over time. It’s a sure bet with which we all can win without having to name the seven wonders of the world in six seconds.

Every bit you can add to your retirement money will multiply it with the power of growth on growth over time.